All posts by Robert Wright

How much super do I need to retire in Australia?

By Robert Wright /August 22,2025/

The amount of super you need to support your retirement will depend on what kind of lifestyle you’re hoping to enjoy and how much income you’ll be earning in addition to your super savings. Income from the Age Pension, part-time work and other financial investments will affect the amount of super you need to retire comfortably.

The Association of Superannuation Funds of Australia (ASFA) provides yearly total income recommendations based on the type of retirement you’re aiming for. Depending on how much income you expect to receive from other sources, you can then estimate how much super you’ll need to reach the “comfortable” or “modest” benchmarks.

The table below gives you an idea of how much retirement income you might need to enjoy a comfortable, or modest retirement, and compares these benchmarks against how much you can receive on the Age Pension.

	Comfortable lifestyle	Modest lifestyle	Maximum rate of Age Pension
Single	$52,383	$33,386	$29,874.00
Couple	$73,875	$48,184	$22,518.60 (each) a year

Budgets for various households and living standards for those aged 65-84 (March quarter 2025)
Source: ASFA Retirement Standard

The amount of super you need will also depend on what you’re earning from full or part-time work, the Age Pension and other investments.

To enjoy a comfortable retirement, AFSA suggests that single people will need $595,000 in super savings at age 67, and couples will need $690,000. But your own individual goal will depend on your other income streams and personal situation.

In addition to the total amount of super you have, the way you access it once you retire can also impact your retirement wealth. For example, your super earnings might be subject to more tax if you plan to withdraw lump sums, compared to setting up a super income stream like an account-based pension.

What’s the difference between a comfortable and modest retirement in Australia?

A comfortable retirement means you can look forward to a broad range of leisure and recreational activities, with a good standard of living. ASFA guidelines suggest you’ll be able to purchase things like private health insurance, a reasonable car, good clothes and a range of electronic equipment. You’ll enjoy domestic and occasionally international, holiday travel.

According to ASFA, you can expect a modest retirement to be better than living on the government Age Pension. However, you’ll only be able to enjoy a fairly basic lifestyle.

See the charts below to get a more detailed understanding of what sort of services and luxuries you might be able to enjoy, based on your retirement savings.

	Comfortable lifestyle	Modest lifestyle	Age Pension
Medical	Top level private health insurance, doctor/specialist visits, pharmacy needs	Basic private health insurance, limited gap payments	No private health insurance.
Technology	Fast reliable internet/telco subscription, computer/android mobile/streaming services	Basic mobile, modest internet data allowance	Very basic mobile and limited internet connectivity
Transport	Own a reasonable car, car insurance and maintenance/upkeep	Owning a cheaper, older, more basic car	Limited budget to own, maintain or repair a car
Lifestyle	Regular leisure activities including club membership, cinema visits, exhibitions, dance/yoga classes	Infrequent leisure activities, occasional trip to the cinema	Rare trips to the cinema
Home	Home repairs, updates and maintenance to kitchen and bathroom appliances over 20 years	Limited budget for home repairs, household appliances	Struggle to pay for repairs, such as leaky roofs or major plumbing problem
Haircuts	Regular professional haircuts	Budget haircuts	Less frequent haircuts, or self haircuts
Home cooling and heating	Confidence to use air conditioning in the home, afford all utilities	Need to keep a close watch on all utility costs and make sacrifices	Limited budget for home heating in winter
Eating out	Occasional restaurant meals, home delivery meals, take away coffee	Limited meals out at inexpensive restaurants, infrequent home delivery or take away	Only local club special meals or inexpensive take away
Clothing	Replace worn out clothing and footwear items, modest wardrobe updates	Limited budget to replace or update worn items	Very basic clothing and footwear budget
Travel	Annual domestic trip to visit family, one overseas trip every seven years	Annual domestic trip or a few short breaks	Occasional short break or day trip in your own city

Annual budgets for households and living standards for those aged 65-84 (March quarter 2025)
Source: ASFA Retirement Standard

Do I need a second income stream in retirement?

This will come down to your personal circumstances, and what kind of lifestyle you’re hoping to enjoy when you retire.

Planning ahead is a great idea if you want to supplement your super with additional streams of income. For example, you could:

build up your financial investments
top up your super with salary sacrifice or a personal super contribution
find part-time employment
apply for the Age Pension.

What government benefits could I receive?

When you retire, you might be eligible for government benefits like the Age Pension or a concession card. This will depend on your age, your residency status, and your financial situation.

As of 20 March 2025, the maximum Age Pension is:

$1,149 per fortnight for singles ($29,874 a year).
$866 each per fortnight for couples ($22,516 a year).

If you’re eligible for the Age Pension, you may also be able to access additional government payments, such as:

Carer allowance: If you provide daily care to an elderly person or someone with a disability or a serious illness.
Rent assistance: To help cover your rent if you’re renting privately.

If you’re receiving the Age Pension, the government will automatically send you a Pensioner Concession Card. Even if you’re not eligible for the Pensioner Concession Card, you might still be able to get a Commonwealth Seniors Health Card, subject to being eligible.

Either of these cards will allow you to access:

cheaper medicines on the Pharmaceutical Benefits Scheme (PBS)
bulk billing for doctor’s appointments
reduced out of hospital expenses through Medicare.

Note that there may be additional concessions from state or territory governments, or from local councils and businesses.

How can I set myself up for the retirement I want?

Your first step will be to create a clear vision for the retirement you want. Ask yourself: What type of lifestyle do you want to enjoy in retirement? Modest, comfortable, or would you like even more freedom? Use the table above to figure out what you’d like your retirement to look like.

Secondly, are you currently on track to achieve this goal?

If you’re not quite on track to reach your goal, you can start thinking about strategies to boost your retirement wealth. This might include topping up your current super savings, working part-time, or building up your other financial investments.

If you’re unsure about the best way to set yourself up for a retirement which supports your personal goals, a financial adviser can help steer you in the right direction.

Calculating how much super is needed for retirement

A retirement calculator helps you estimate how much money you’ll need for the retirement lifestyle you want – and how much money you might have when you retire, based on your super savings and other assets.

The calculator will also show you the impact of potential investments, fees and voluntary contributions to your super and your retirement wealth.

Consider the ASFA benchmarks for a modest and comfortable retirement, other income streams like part-time work or investments and your own financial goals when determining how much super you’ll need when you retire.

How can I grow my super?

Topping up your super is a good way to boost your retirement wealth and may provide tax-concessions in the short term.

Currently, your employer must pay 12% of your ordinary time earnings into your nominated super fund. These contributions are called Superannuation Guarantee (SG) contributions. However, there are a few different ways you can contribute more of your own money towards your super.

As super compounds each year, even a small contribution can go a long way towards building up your retirement wealth so you can enjoy the type of retirement you want.

If you’re still not sure about the best way to set yourself up for retirement, consider speaking with a financial adviser. They’ll review your personal situation and help you find the solution which best suits your life stage, financial goals and risk tolerance.

Source: Colonial First State

Carry forward concessional contributions

By Robert Wright /August 22,2025/

If you’re looking for ways to potentially increase your retirement savings while reducing tax, carry forward concessional contributions could be a good option.

Carry forward concessional contributions

If you’ve had time out of work raising kids or for other lifestyle reasons, or you haven’t had the money to boost your super until now, you could take advantage of carry forward concessional contributions (also known as catch up contributions).

If you’re eligible, the Australian government allows you to catch up on your super contributions by adding in more than the annual limit, so you can enjoy life at retirement without worrying about money.

What are carry forward concessional contributions?

Carry forward concessional contributions, also known as catch up contributions, fall under concessional (before-tax) contributions. Concessional contributions include:

employer contributions (such as super guarantee and salary sacrifice).
personal contributions that you claim as a tax deduction.

There is an annual cap for concessional contributions which is currently $30,000.

If eligible, you can contribute more than $30,000 this financial year by using any unused concessional contributions caps from the previous five financial years.

Benefits of carry forward super contributions

Making additional before-tax contributions can be a tax-effective way to boost your retirement savings.

Super contributions are taxed at 15% (up to an additional 15% tax may apply to higher income earners) which is often a lot lower than most peoples’ marginal tax rate (rate of tax you pay on your personal income) which can be up to a maximum of 47% including the Medicare levy.

Any earnings you receive on your contributions once they are in your super account are also only taxed at up to 15%.

Case study examples

Here’s a few examples of how carry forward concessional contributions could benefit you.

Example 1: Tax savings

John, a 50 year old with a total super balance under $500,000. He receives a bonus at work and decides to use the bonus to make additional concessional contributions to super including unused amounts from the previous five financial years.
This not only helps him save more for retirement but also reduces his taxable income and tax liability for the year.

Example 2: Boosting retirement savings after a career break

Mark took a career break in his early 30s to care for his children. When he returned to work, he wanted to catch up on his super contributions. His total super balance was $400,000. The carry-forward rule allowed him to use the unused cap from up to five previous financial years when he wasn’t working. He did this by making regular salary sacrifice contributions through his employer which helped him rebuild his super balance more quickly as well as providing additional personal income tax savings.

Example 3: Accelerating retirement savings close to retirement

Lisa, who is in her late 50s, is planning to retire in a few years. She realises her super balance is not as high as she’d like it to be at $300,000. Carry forward concessional contributions enable her to decrease her tax and increase her super savings in the final years before retirement, giving her a better lifestyle in retirement. She does this by making salary sacrifice contributions through her employer.

Eligibility rules for carry forward concessional contributions

To make a carry forward concessional contribution, there are specific conditions you need to meet:

You need to be under the age of 75 – your contribution must be received by your super fund on or before 28 days following the end of the month you turn 75.
Your total super balance needs to be less than $500,000 on 30 June of the previous financial year.
You can only carry forward unused concessional contributions from 1 July 2020.
Unused concessional cap amounts can only be carried forward for five financial years until they expire.

Eligibility criteria for super contributions, including carry forward concessional contributions, can change over time. It’s essential to check with the Australian Taxation Office or consult a financial adviser for the most up to date information.

Calculating your carry forward concessional contribution amount

Check your previous 30 June total super balance with the ATO. This is available via the MyGov website. You want to ensure your total super balance is under $500,000 as at the previous 30 June.

Once you login to your account, you can also use MyGov to work out the amount of unused concessional contributions cap that is available.

Important things to consider for carry forward concessional contributions

Keep in mind that carry forward concessional contributions are part of the concessional contributions cap, which includes employer contributions (such as super guarantee and salary sacrifice contributions) and personal contributions that you claim as a tax deduction. When determining the amount of unused concessional contributions cap that is available for the current financial year, consider any future concessional contributions you intend to make.

It’s also important to remember that you can’t access your super until you meet a condition of release, such as reaching age 65 or age 60 and either retiring or ceasing work.

To use up carried forward concessional cap amounts, you may want to make salary sacrifice or personal deductible contributions to super.

How do super bring forward rules differ to carry forward concessional contributions?

Super bring forward rules

Super bring forward rules relate to after-tax contributions, allowing you to contribute more into super in a shorter period. Under these rules, you can bring forward up to two years’ worth of non-concessional (after-tax) contributions.

The annual non concessional contributions cap is $120,000 for the 2025-26 financial year. However, using the bring forward rule, you could contribute up to $360,000 if eligible.

If your total super balance is less than the general transfer balance cap of $2.0 million, you may be eligible to make non-concessional (after-tax) contributions. Depending on your total super balance you may be able to use the bring forward rule.

Carry forward concessional contributions

Carry forward concessional contributions are for before-tax contributions, enabling you to make up for past years where you may not have utilised all your concessional contribution caps. Generally, concessional contributions reduce your personal taxable income and tax payable.

Ready to make a carry forward concessional contribution?

Adding a little extra to your super can be a great way to boost your super savings for retirement.

Frequently Asked Questions

How do I determine my carry forward contributions for the current financial year?

Carry forward concessional contributions are in addition to the current financial year’s concessional contributions cap ($30,000 for 2025-26). Your carry forward concessional contributions or unused concessional contributions cap for the previous five years, can be obtained from the ATO using MyGov. Check that the information in MyGov is consistent with what you believe has occurred.

Do I need to notify my super fund to make carry forward concessional contributions?

If you intend to claim a tax deduction for personal contributions, you must lodge a valid notice of intent to claim a tax deduction with your super fund. Strict timing requirements apply. However, you don’t have to notify your super fund that you intend to use carry forward concessional contributions.

Can I make carry forward concessional contributions at any time during the financial year?

Generally, you can make carry forward concessional contributions at any time during the financial year, however:

where personal contributions are made on or after age 67, a work test or work test exemption must be satisfied in the financial year to be eligible to claim a tax deduction.
if you’re turning 75, a personal tax-deductible super contribution cannot be made after 28 days following the end of the month you turn 75.
there are strict timing requirements for lodging a notice of intent to claim a tax deduction with your super fund. See the ATO website for more information.

What are the tax benefits of carry forward concessional contributions?

Carry forward concessional contributions can help to reduce your taxable income for the year in which you make them. This can result in potential tax savings, especially if you’re in a higher tax bracket.

Source: MLC

Protecting retirement income from inflation

By Robert Wright /August 22,2025/

The fall in inflation from multi decade highs is good news for the Australian economy. Many retirees are struggling to manage their cost of living because of the cumulative impact inflation has had on their financial position.

Looking forward, retirees need a portfolio that is protected from inflation risks so that they don’t experience another cost of living crisis when inflation has another upturn.

Maintaining the long-term real value of investments

The key to a successful investment strategy is the ability to generate returns over the long term. Managing inflation is an important piece of the strategy. Long-term investments need to be able to generate a real rate of return that provides growth in the investment value. The investments do not need to capture short-term inflation changes, but they need to offset the impact of inflation over time. Assets that are expected to do this are generally referred to as ‘growth’ assets. To demonstrate this, we can look at the historical performance of assets over the long run¹. Looking at Australian investment returns between 1900 – 2023, equities provided a return higher than inflation in 81 years which was 73% of the time. The one-year success rate for bonds and bills (cash) were lower, constrained by historical limits on bond yields. Both bonds and bills provided a one-year real return only 62% of the time in the same period.

The long run probabilities are shown in Figure 1. As the investment horizon extends out, up to 25 years, the probability of equities providing a real return increases. The higher returns on the investment eventually overcome any initial shortfall. Bond and bill investments show little improvement with a longer investment horizon². At horizons of 20 years, the probability of delivering a positive real return from nominal bonds was only 60%. Historically, all investment horizons of 16 years (and longer) have provided a positive real return for Australian equities. While history does not provide a guarantee, the increase shown in Figure 1 should provide confidence that a long-term investment in equities will provide real capital growth. This analysis can be extended to diversified products such as a 70/30 growth fund (70% equities and 30% bonds) and a 50/50 balanced fund (50% equities and 50% bonds). These both show trend improvements over time, benefiting from the exposure to growth assets, but over longer periods. The 70/30 fund needed 20 years and the 50/50 fund 25 years historically to ensure the positive real return.

The portfolio comparison in retirement is important in the generation of income over longer periods. If income is taken as a set percentage of the balance than changes in income will directly link to market movements. Also, there are market linked annuities available in Australia where the capital is consumed but the income, which is paid for life, will be directly linked to the performance of the specified market or underlying investments. This paper provides a historical basis to consider the inflation protection provided by these income streams. Historical investment performance is not a reliable indicator of future performance, but it is worth considering the timeframe for recovery from historical shocks.

Figure 1: Historical probability of positive real returns, 1900-2023

Source: Calculations, based on data from Morningstar, S&P, Bloomberg and ABS

Inflation risk in retirement

Inflation is often called out as a risk in retirement that needs to be managed differently. Longevity and sequencing risks are also noted as being different, and these are not present in the accumulation phase. One of the challenges with managing inflation risk in retirement, is that inflation risk has a different impact on a portfolio in the retirement phase. Management of inflation risk in retirement needs a different approach. It is not just that capital needs to regain its real value, but every income payment needs to keep its value to maintain the target lifestyle of the retiree.

We can examine this difference by considering the outcome for someone who started to draw an income at the start of 1973. This was one of the worst years in the historical comparison where the inflation spike meant that any investment linked income would be falling in real terms in the first year. If a retiree’s income was linked to an investment, the real value would have declined for any of the three assets: Bills by 3.5%; Bonds by 26% and Equities by 30.7%. What happens over time is the recovery in the level of income. Income linked to equity performance briefly exceeds the original value in 1980 but dips again before maintaining real gains from 1983. Bills provide higher real income from 1985 while bonds will take until 1992. The 19 year impact on bonds highlights the exposure that nominal bonds have to inflation risks. The pattern for income linked to the different markets from 1973 can be seen in Figure 2.

Figure 2: Investment-linked income example

Source: Calculations, based on data from Morningstar, S&P, Bloomberg and ABS

There is more at stake for retirees. The impact is not just the length of time to recover the real capital value, but the income that is lost over that period. For the nine years that the real equity linked income is under the starting point, a retiree needs to reduce their lifestyle or run their capital down early. The shortfall is shown in Figure 3. It highlights the cumulative shortfall in income, relative to the initial lifestyle of the retiree. The starting point is where inflation risk creates an impact which might be after the start of retirement.

The shortfall highlights the extent of the impact from an inflation shock. The worst performance is from bonds, where more than 7 years of income (lifestyle) were lost over a 17-year period before a modest recovery. For equity-linked income, nearly three years of lifestyle were lost over nine years. While there was a strong recovery after, this is an average of a third of total spending that needs to be cut for an extended period. Cash investments took longer to fully recover, but the extent of the pain was not as large. The worst point is ten years after the shock, where the retiree has missed 1.7 years of real spending.

Figure 3: Cumulative shortfall in real incomes

Source: Challenger calculations, based on data from Morningstar, S&P, Bloomberg and ABS

The extended pain highlights why inflation risk is an additional risk to consider in retirement. It is not just the capital recovery, but it is the lost lifestyle that happens when an income stream does not keep pace with inflation. Retirees that choose a market linked income stream need to have the capacity to sustain a potential extended period of reduced lifestyle before they can enjoy an increased lifestyle later in retirement.

Payment profiles and income indexation

The analysis so far has highlighted how inflation shocks can impact a lifestyle based on an initial spending level. In practice, not all spending profiles are the same. The different approaches to generating income provide differing levels of starting income. Some differing options for indexation of an income stream include:

CPI linked lifetime income
Market linked lifetime income³
Accelerated payments with market-linked lifetime income

A CPI linked lifetime income stream sustains the lifestyle of the retiree by adjusting their payments with changes in the cost of living. A market linked income stream uses an indirect approach, that requires market movements to exceed CPI inflation over time to maintain the lifestyle of the retiree. Accelerated payments are designed to smooth the income profile of market linked income streams. Recognising that payments are expected to grow over time, some of the income can be front-loaded by indexing the payments by a fixed percentage lower than the market return. This provides a higher starting payment that will grow more slowly. This fixed percentage is sometimes called the assumed investment rate (AIR). The analysis includes payments for an AIR of 2.5% p.a. and 5% p.a. The difference in the initial payment rates as shown in Figure 4 can be substantial.

Figure 4: Initial payment rates

Source: Challenger, as at 8 April 2024

Current rates provide a range of starting payments, per $100,000 of around $4,000 to $7,000 a year, for a 65 year old male. A market-linked lifetime annuity with a 5% AIR has payments starting at a rate 78% higher than one with no AIR. Over time the payments will increase by 5% less each year so over time the payments will cross over. This wedge is independent of market movements.

The paths for the 30 years from Dec 1993 to Dec 2023 can be seen in Figure 5. This shows the five-fold increase for payments that were linked to the accumulation performance of the S&P/ASX200 over that time. The 5% AIR hurdle provided the highest initial payment, but lower indexation meant that this would not have been the highest after 2004, only 11 years into retirement. The smaller increase in the payments with a 5% AIR would not have kept up with inflation from the initial payment level. It provided a flatter spending profile that declines in real terms.

Figure 5: Market-linked payments over time

Source: Challenger, S&PASX200

Dividend strategy

Another approach with an equity investment is to use only the dividend payments for retirement income. Dividend yields tend to be counter cyclical so dividends are not as volatile as share prices. The question is how well they keep up with inflation over time. Again, we can use the available historical data⁴ to see what might have happened. One difference is that none of the dividends are reinvested. When dividends are higher, a market linked strategy effectively reinvests the excess. A dividend strategy spends this excess which has an impact over longer horizons.

Another difference with a dividend strategy is the starting income levels. The starting income reflects the dividend yield available at the time, with no consumption of capital over time. The first challenge is to see if the dividends protect from inflation for the given starting level. Figure 6 highlights how the dividend strategy does not provide the same level of protection of an equity market-linked strategy. It begins with a 60% success rate, similar to the equities market linked strategy with a 5% AIR. Over time, the success rate improves, but it does not match an equity market linked strategy. Historically, dividend growth over 25 years was below inflation in 10% of the scenarios. The earliest in this sample was 1929-1954 and the latest was 1969-1994.

Figure 6: Inflation protection of a dividend strategy

Source: Challenger calculations, based on data from Morningstar, S&P, BHM, Bloomberg and ABS

The dividend strategy maintains the capital invested in the underlying equities so the income payments will be lower than what can be achieved if the capital is consumed over retirement. On average, the dividend yield has been 4.65% p.a. and is currently 5.2% including franking credits. Investors might expect inflation protection similar to an equity linked 5% AIR investment. In practice, the initial income is lower with a dividend strategy, but the lower income is better protected than the 5% AIR strategy. However, it can take a long time to catch up the initial income gap.

Another impact of maintaining the capital is that the dividend strategy does not increase payments at older ages. The comparison to market linked lifetime income streams is shown in Figure 7 which shows that only the market-linked strategy with a 5% AIR has a higher initial payment at age 65, but by age 75, the dividend strategy provides lower payments than any of the other strategies. This demonstrates that a dividend strategy supports a lower lifestyle than a strategy that will consume capital over time. Retirees are unable to maximise the money available to spend through retirement if they do not draw down on their capital.

Figure 7: Initial payment rates per $100,000 investment at different ages

Source: Challenger as at 8 April 2024 with calculations based on S&P data as at Dec 2023

Age Pension

Another consideration for retirees thinking about inflation protection is their entitlement to the Age Pension. Around two in three current retirees receive at least a partial Age Pension, and while this is likely to decline, a significant proportion of retirees will continue to receive some Age Pension in the future. The Age Pension provides an income stream that automatically increases with inflation. Over time, it will also increase with real wages growth, but the real wage declines in recent years mean that it is probably still several more years until the Age Pension will increase more than inflation. The mechanics of the Age Pension indexation can result in retirees receiving a partial Age Pension being over compensated. The full Age Pension payment is indexed and any means tested amounts are calculated relative to the new full payment. While earned income is likely to increase with inflation, the assets held by an asset tested pensioner might increase by less than inflation, or even fall. In this case, the proportionate increase in Age Pension payments might be higher than inflation reducing the need to fully protect a retirement portfolio from inflation. This protection is provided only up to the value of the Age Pension. If a retiree has any lifestyle requirements above the safety net provided by the Age Pension they need to be fully protected against inflation.

Conclusion

Protecting an investment portfolio from inflation can be an important concern for any investor. In retirement, the challenge increases as a retiree needs to protect their income stream to be able to sustain their lifestyle. While some investments can protect against inflation over the long run, market linked investments don’t necessarily protect an income stream from inflation over the short to medium term. Retirees who want to be able to maintain their lifestyle need the inflation protection that can be provided by a CPI linked income stream. The Age Pension will deliver some of this for retirees, but those with a lifestyle goal above the Age Pension’s safety net will need an additional source of inflation protected income.

¹The historical data in this paper comes from the Dimson, Marsh and Staunton dataset as provided by Morningstar. Recent data on indices relates to the S&P/ASX 200 Accumulation index, Bloomberg AusBond Composite 0+Yr Index and Bloomberg AusBond Bank Bill Index. Recent inflation data is the CPI sourced from the Australian Bureau of Statistics.

² The majority of these periods were between 1933 and 1973 when bond yields were set by regulation.

³Different market-linked options are available, but the initial payment is the same for each option.

⁴Historical data is calculated as the difference between Accumulation and price returns in the BHM dataset: Brailsford, T., J. Handley & K. Maheswaran (2012) The historical equity risk premium in Australia: Post GFC and 128 years of data. Accounting and Finance Vol52.1 pp237-247. Franking credits have been included for the period post 1987

Source: Challenger

Reserve Bank cuts interest rates by 0.25 percentage points in August in unanimous decision

By Robert Wright /August 22,2025/

In short:

The Reserve Bank cut interest rates by 0.25 percentage points in August to 3.6 per cent, after July’s shock ‘on hold’ decision.

The average owner-occupier with a $750,000 mortgage as of February will see their minimum monthly repayment fall $111 if their bank passes on the cut, taking the cumulative reduction this year to $340, according to Canstar.

What’s next?

The next RBA rates decision will be delivered on September 30. After that, there are two further meetings this year, in November and December.

The Reserve Bank has delivered its third interest rate cut of 2025, with a 0.25 percentage point reduction at its August board meeting.

That takes the cash rate to 3.6 per cent for the first time since April 2023.

The move had been overwhelmingly anticipated by financial markets and economists after the surprise decision to hold rates steady in July.

It was a unanimous decision by board, which had been divided last month.

Tuesday’s cut follows a further easing of inflation in the June quarter, which RBA governor Michele Bullock last month highlighted as the crucial piece of data the monetary policy board was waiting for.

“Updated staff forecasts for the August meeting suggest that underlying inflation will continue to moderate to around the midpoint of the 2–3 per cent range, with the cash rate assumed to follow a gradual easing path”, the post-meeting statement read.

ABC News / Source: Reserve Bank of Australia

The inflation pull back, alongside “labour market conditions easing slightly, as expected”, led the board to deem “further easing of monetary policy was appropriate”.

“This takes the decline in the cash rate since the beginning of the year to 75 basis points”, the RBA board noted in its statement.

The central bank cut interest rates at its February and May board meetings.

Before that, the RBA’s cash rate had sat at 4.35 per cent since November 2023, after a series of 13 rate hikes, beginning in May 2022.

Treasurer Jim Chalmers described it as a “very welcome relief for millions of Australians”.

“It means the lowest interest rates for more than two years”, he said shortly after the decision.

“It reflects the substantial and sustained progress we’ve made on inflation in a volatile and uncertain global environment”, the treasurer noted in a statement.

Cash rate at 3.6pc, further rate cuts expected

The Australian dollar fell following the decision, dipping just below 65 US cents as Ms Bullock addressed a media conference in Sydney.

The RBA governor indicated the board was prepared to cut interest rates further if necessary.

“The forecasts imply that the cash rate might need to be a bit lower than it is today to keep inflation low and stable, and employment growing, but there is still a lot of uncertainty”, Ms Bullock told reporters.

“The board will continue to focus on the data to guide its policy response”.

Where are rates heading?

The Reserve Bank’s economic outlook suggests further room to cut interest rates, but it’s not all good news for most working-age Australians.

Betashares chief economist, David Bassanese has forecast further interest rate cuts, with the next easing more likely in November, rather than at the next meeting in September.

“Indeed, the [central] bank’s own forecasts of underlying inflation stabilising at 2.6 per cent over coming quarters incorporate further declines in the cash rate in line with current market expectations”, he wrote.

“That said, barring a major growth scare, the RBA does not seem in any rush to cut interest rates.

“All up, my base case remains that a rate cut on Melbourne Cup day is an odds on favourite –following release of the June quarter consumer price index report in late October”.

The governor would not be drawn on what specific cash rate the central bank considers to be “neutral” – that is, the level where the rate is not stimulating or putting a handbrake on the economy.

Instead, she gave a “very wide range” of between 1 and 4 per cent, and noted a neutral rate is for when there is an absence of economic shocks.

“We are very often not in the absence of shocks … we’ve got shocks, particularly at the moment”.

While the central bank’s forecasts put inflation around target over the period ahead, it has downgraded its growth forecasts.

It now expects gross domestic product (GDP) expanded 1.6 per cent over the year to June (compared to 1.8 per cent forecast in May); and GDP growth to only pick up to 1.7 per cent by the end of the year (it had previously forecast 2.1 per cent).

“Its forecasts assume that the cash rate will continue to ‘follow a gradual easing path’, implying that without further easing growth and inflation will be lower and unemployment higher”, AMP chief economist, Shane Oliver said.

AMP has forecast further rate cuts in November, February and May to take the cash rate to 2.85 per cent.

“We continue to see further rate cuts as growth remains sub par, the risks to unemployment are on the upside, underlying inflation is likely to remain around the 2.5 per cent target and monetary policy remains tight”, Dr Oliver wrote.

How much will home loan repayments fall?

Some lenders were quick off the mark to confirm they would be passing on the interest rate cut to home loan customers, with Macquarie, Commonwealth Bank, Westpac, ANZ, NAB and AMP among the first handful of announcements.

The cumulative effect of three rate cuts so far this year have added up to a substantial reduction in minimum mortgage repayments for many home loan borrowers.

According to calculations by financial comparison site Canstar, the savings from this month’s cut range from $74 on a half a million dollar mortgage, to $148 on a $1 million home loan.

Based on an owner-occupier paying principal and interest with 25 years remaining in Feb 2025 at the RBA average existing customer variable rate. Calculations assume the banks pass on each cut in full to existing variable customers the month after.

Source: Canstar.com.au

The numbers are based on an owner-occupier repaying principal and interest, who had 25 years remaining on their loan in February.

The estimates assume borrowers were paying the average variable rate of 5.79 per cent, which would fall to 5.54 per cent after Tuesday’s 0.25 percentage point cut, and that lenders pass on cuts in full to existing variable customers the following month.

Home loan borrowers are not obliged to lower repayments, and, in fact, most do not – last month, Commonwealth Bank released data showing only one in 10 eligible home loan customers reduced their mortgage direct debits after the rate cut in May.

If borrowers continue to make repayments above the minimum required, they will pay down more of the principal as the interest reduces, and pay off their loan faster.

Source: ABC News